On April 28, 2013, the State Administrative of Foreign Exchange (“SAFE”) issued “The Administrative Measures for the Registration of Foreign Debt” (entitled “The Operational Guidelines for the Registration of Foreign Debt”) (Hui Fa [2013] No.19) (collectively, the “No. 19 Circular”)1. The No. 19 Circular came into effect on May 13, 2013.

The No. 19 Circular is a major milestone in foreign exchange administration, as it combines and integrates the existing departmental regulations, and clarifies approval principles in a systematic way.

June 2013 Finance China Bulletin White & Case is a leading global law firm with lawyers in 39 offices across 27 countries. Whether in established or emerging markets, White & Case is dedicated to the business priorities and legal needs of its clients. If you have questions or comments regarding this bulletin, please contact: Baldwin Cheng Partner, Hong Kong + 852 2822 0405 bcheng@whitecase.com John Shum Partner, Hong Kong + 852 2822 8748 jshum@whitecase.com Xiaoming Li Partner, Beijing + 86 10 5912 9601 xli@whitecase.com ATTORNEY ADVERTISING. Prior results do not guarantee a similar outcome. In This Issue... ¦¦ SAFE’s New Rule Simplifies and Clarifies Foreign Debt Registration Welcome to the June issue of White & Case's China Finance Bulletin. This bulletin is a regular update on the PRC finance sector ensuring you stay up to date with the latest legal, regulatory and practice developments. SAFE’s New Rule Simplifies and Clarifies Foreign Debt Registration On April 28, 2013, the State Administrative of Foreign Exchange (“SAFE”) issued “The Administrative Measures for the Registration of Foreign Debt” (entitled “The Operational Guidelines for the Registration of Foreign Debt”) (Hui Fa [2013] No.19) (collectively, the “No. 19 Circular”)1. The No. 19 Circular came into effect on May 13, 2013. The No. 19 Circular is a major milestone in foreign exchange administration, as it combines and integrates the existing departmental regulations, and clarifies approval principles in a systematic way. The key changes made by the No. 19 Circular are: Clarification of preconditions to an FIEs’ incurrence of foreign debt The No. 19 Circular has reinstated that the amount of foreign debt that can by borrowed by foreign invested enterprises’ (“FIEs”) shall not be higher than its“borrowing headroom” which is the difference of its total investment and registered capital. Another precondition is that capital injection to an FIE should be “completed”. Prior to issuance of the No. 19 Circular, it was not clear what constituted “completion of capital injection”, in particular in the case of capital injection made in instalments. In practice, different local branches of SAFE had different interpretations of “completion of capital injection”. The No. 19 Circular has clarified that foreign shareholders of an FIE should at least make the first instalment of its capital injection prior to any borrowing of foreign debt by that FIE. The No. 19 Circular also explicitly allows FIEs to borrow an amount of foreign debt which is in proportion to the ratio of the actual paid-in capital contributed by its foreign shareholders to total capital agreed to be contributed by the foreign shareholders.2 1 The Chinese version of the No. 19 Circular can be found at http://www.gov.cn/zwgk/2013-05/03/content_2395170.htm. 2 Paragraph 2 of the “application principles” column in Annex 1 of the No. 19 Circular. China Finance Bulletin 2A breakthrough in an FIEs’ borrowing headroom Before the No. 19 Circular became effective, an FIE’s borrowing headroom would be permanently reduced by the cumulative amounts of medium-to-long term foreign debts that the FIE incurred, in other words, any subsequent repayment of such foreign debt would not result in a corresponding increase of its borrowing headroom. The No. 19 Circular explicitly provides that any extension or refinancing of an FIE’s medium-to-long term foreign debt would not take up any additional borrowing headroom of that FIE, as long as there is no increase in the outstanding amount of the medium-to-long term foreign debts and that FIE does not convert any foreign currency into Renminbi.3 Treatment of certain FIEs as Domestic Enterprises The No. 19 Circular provides that certain types of enterprises with foreign investment shall, for the purpose of foreign debt administration, be treated as Chinese-funded enterprises which are subject to even more stringent restrictions on incurrence of foreign debt. Those enterprises are (a) Chinese-funded enterprises domestic enterprises with foreign investment of less than 25 percent (the “Domestic Enterprises”), (b) FIEs whose total investment and registered capital are equal, and (c) FIEs without a clear total investment amount. Abolishment of certain SAFE approvals The No. 19 Circular has abolished approvals by SAFE of the following matters: (a) Conversion by FIEs of foreign debt proceeds into Renminbi.4 However, if an FIE intends to apply foreign debt proceeds towards refinancing of its existing debts, it is not allowed to convert such proceeds into Reminbi5. Such restriction can effectively prevent FIEs from using foreign debt proceeds to refinance its Reminbi loans. (b) Opening of foreign debt accounts. Non-bank borrowers may open accounts for withdrawal and repayment of foreign debts as long as the foreign debt has been registered with SAFE. (c) Verification of repayments of foreign debt. A bank can now verify repayment of foreign debt directly. Clarification of the permitted usage of foreign debt proceeds The No. 19 Circular confirms that proceeds of foreign debt borrowed by FIEs and Domestic Enterprises may be applied towards trade and services within its own business scope and towards eligible financial transactions. For financial transactions, the No. 19 Circular sets up certain restrictions. Among other things, if the foreign debt proceeds will be used towards refinancing existing debt, such proceeds cannot be converted into Renminbi.6 Domestic debt with foreign security Before the No. 19 Circular was issued, only Domestic Enterprises in pilot program areas could take advantage of security or guarantee granted by offshore entities securing or guaranteeing loans extended by onshore lenders, as once the debt was paid off by the offshore security provider or guarantor, there was an actual debt owed by the Domestic Enterprise to its offshore security provider or guarantor which constitutes a foreign debt of that Domestic Enterprise. Pursuant to the No. 19 Circular, once certain conditions are satisfied, such deal structure is now available to Domestic Enterprises that have been granted with a quota by the local SAFE. SAFE’s requirements for granting such quota include, without limitation (a) such Domestic Enterprise being in sectors encouraged by the government, (b) being in good standing, (c) having a net asset to total asset ratio of no less than 15 percent, and (d) having an aggregate foreign debt and external guarantee amount not exceeding 50 percent of its net assets.7 Summary Generally speaking, after the No. 19 Circular became effective, save for the registration of a loan agreement evidencing a foreign debt with SAFE, which remains the biggest hurdle, most other procedures, such as foreign-debt account opening, conversion of foreign debt proceeds into Renminbi and repayment of foreign debts, can be handled by banks. 3 Paragraph 3 of the “application principles” column in Annex 1 of the No. 19 Circular. 4 Clause 14 of the No. 19 Circular. 5 Paragraph 5(1) of the “notes” column in Annex 3 of the No. 19 Circular. 6 Paragraph 5 of the “notes” column in Annex 3 of the No. 19 Circular. 7 The “application principles” column in Annex 8 of the No. 19 Circular.whitecase.com Finance at White & Case White & Case’s global banking and finance capability is one of the world’s strongest. The Firm’s historical focus on the representation of banking clients means we are ideally placed to understand and represent these interests. Our bank finance practice is known for structuring first-of-a-kind deals, responding quickly when decisiveness matters and delivering the success that further establishes our leading credentials: ¦¦ Tier #1 in China Banking & Finance (International Firms)—Chambers Asia 2013 Our noted areas of expertise include acquisition finance, bank advisory, credit transactions, derivatives, leasing and other asset-backed activity, and structured finance. In China and globally, our experienced team is intimately familiar with every aspect of deal structure, negotiation and documentation, and we aim to give precisely the right level and type of support at each stage of the deal—starting with strategic advice on alternative structures through negotiation and documentation, keeping your deal on track. Our Firm White & Case is a global law firm with longstanding offices in the markets that matter today. Our on-the-ground experience, our cross-border integration and our depth of local, US and English qualified lawyers help our clients work with confidence in any one market or across many. We guide our clients through difficult issues, bringing our insight and judgment to each situation. Our innovative approaches create original solutions to our clients’ most complex domestic and multijurisdictional deals and disputes. By thinking on behalf of our clients every day, we anticipate what they want, provide what they need and build lasting relationships. We do what it takes to help our clients achieve their ambitions. Some of our independent accolades include: ¦¦ Number One Global Law Firm—Law360 2012 ¦¦ International Trade and Finance Law Firm of the Year —U.S. News & World Report – Best Lawyers 2011 – 2012 ¦¦ Best Corporate High-Yield Bond of the Year—LatinFinance 2012 ¦¦ Competition and Project Finance Practice Groups of the Year—Law360 2012 ¦¦ Leading Innovative US Firm in Finance, Litigation, Corporate and Business of Law —Financial Times US Innovative Lawyers 2012 This bulletin is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This bulletin should not be acted upon in any specific situation without appropriate legal advice and it may include links to websites other than the White & Case website. White & Case has no responsibility for any websites other than its own and does not endorse the information, content, presentation or accuracy, or make any warranty, express or implied, regarding any other website. This bulletin is protected by copyright. Material appearing herein may be reproduced or translated with appropriate credit. In this publication, White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, corporations and undertakings. AP0613001_03

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